Apollo Investment Management

More interesting times
Apollo Asia Fund: the manager's report for 4Q2007

The Apollo Asia Fund's NAV fell 1.2% in the fourth quarter, closing at US$869.77, 2.6% below the high-water mark established at the end of October. The gain for the year was 17.5%.

Turnover for the year was 26%, at the lower end of historical experience. In the fourth quarter it was even less: we finished selling one long-held stock which had become significantly overpriced, introduced one new name, augmented one position and trimmed another. The return of some fear to temper the recent complacency and euphoria is making valuations more interesting, but those in our usual hunting grounds are not yet particularly exciting, given the evident new headwinds for corporate profits. While the number of spectacular price collapses appears to be increasing, these are often for good reason: few of the falling knives have yet inspired us to attempt a catch. The forthcoming reporting period should however be particularly interesting.

We see two major exceptions to these generalisations. One is Thailand, which is relatively cheap, with some well-run companies, but our exposure seems broadly sufficient given current political risks, and given the illiquidity of our holdings. The other is Japan, on which both Masya and I are currently inclined to focus: reader input would be most welcome.

Geographical breakdown
by listing; 31 Dec 07
% of assets
Hong Kong
Other equities
Net cash & receivables

The geographical mix has changed little over the quarter, and not dramatically over the year. The present cash balance has arisen from bottom-up transactional decisions, rather than a top-down allocation, but in current circumstances we are happy to have the flexibility of cash on hand.

The following note on valuation repeats for the record some comments which are currently on the performance page. Our shares at end-Dec were on an estimated current-year PE of 13.3, with a net dividend yield of 3.8% after Asian taxes, and for what it is worth we are still guessing at EPS growth of the order of 10% for the year ahead. The valuations are more expensive than for most of the period since inception. They may not seem unreasonable, for a portfolio of good businesses with strong balance sheets in one of the stronger regions of an unbalanced and therefore unstable world - but many of our companies are small, illiquid, or both. A discount is appropriate: for small companies because of concentrated risks (a corollary of focus and concentrated rewards) and the dependence on key individuals (big companies have greater momentum); and for illiquidity, not because we intend to trade, but because it greatly increases the costs when we have to do so. On the other hand we tend to calculate EPS on recurrent earnings and full dilution, erring on the side of conservatism, whereas figures reported under new accounting standards often seem to us overstated.

With best wishes to fellow-investors for good fortune in 2008 -

Claire Barnes, 11 Jan 2008

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